Pension360

The collective funding status of corporate DB plans fell 1.6 percent in February, according to the BNY Mellon Institutional Scorecard.

That marks the fourth consecutive month that corporate DB funding has declined; the typical plan is now 78.7 percent funded, according to the scorecard.

More from BNY:

Interestingly, the 2.3 percent increase in liabilities that corporate DB plan sponsors saw in February was higher than the returns of most asset classes over the course of the month. Of the asset classes the scorecard tracks, Global Fixed-Income and Long Duration Fixed-Income assets performed the best, with both returning 2.2 percent. Emerging Market Debt, REITs and High Yield Bonds were also slightly positive, with 1.3, 0.9 and 0.6 percent returns, respectively. International equity was the worst performer, falling by 1.1 percent in February.

“For over a decade, most plan sponsors and investment managers have been calling for a rise in interest rates. 2016 is shaping up to be another humbling year in that regard,” said Andrew Wozniak, head of BNY Mellon Fiduciary Solutions. “On the funding front, a number of our clients are exploring the possibility of making voluntary contributions to mitigate the pain associated with rising variable Pension Benefit Guaranty Corp. premiums and lower funding ratios.”

In February, public DB plans and endowments & foundations also missed their return targets—though only by a small margin. Public plans missed their target of 7.5% annual returns by 60 basis-points; and endowments & foundations missed their target of 5% returns over inflation and spending by 50 basis-points. Both types of investors are heavily weighted toward alternative assets, which account 27 percent of typical public DB portfolios, and 57 percent of endowments & foundation portfolios.

View the scorecard here.

 

Photo by Sarath Kuchi via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Yaldaz Sadakova of Benefits Canada reports, HOOPP’s 2015 return slides to 5% amid volatility:

Amid slow global growth, chronically low interest rates and declining commodity prices, the Healthcare of Ontario Pension Plan (HOOPP) saw its return for 2015 slide to 5.12%, down from 17.7% in 2014. Despite this decline, its funded status has strengthened.

The plan’s 10-year return was 9.32%, down from 10.27% in 2014 (still highest 10-year return among global pensions).

“We suspected 2015 [would] be a challenging year and that’s how it played out,” said Jim Keohane, HOOPP president and chief executive officer, speaking at a press conference in Toronto on March 3. It was a year of “very high volatility and low returns,” he added.

Keohane cited pressures such as slowing growth in China, structural problems in Europe, regulatory requirements for the financial firms serving the pension plan and sliding commodity prices.

Declining energy prices in particular inflicted a lot of pain on the Canadian economy, causing the country to slip into a technical recession in 2015.

As a result of the low interest rates, HOOPP has lowered its discount rate this year from 5.8% to 5.6%, Keohane said.

The pension fund’s investment income also dipped to $3.1 billion in 2015 from $9.1 billion in 2014.

Despite the lower investment income and returns, the multi-employer plan saw its net assets grow to $63.9 billion in 2015 from $60.8 billion in 2014.

Also, HOOPP’s funded position improved last year. It stood at 122%, compared to 115% in 2014. As a result, contribution levels for employers and members have remained unchanged. “We still have one of the lowest contribution rates [among] the major plans,” Keohane said.

HOOPP, which covers Ontario’s hospital and community-based healthcare sector, has about 470 participating employers and 295,000 members.

Matt Scuffham of Reuters also reports, Canada’s HOOPP boosted by strong private equity returns:

The Healthcare of Ontario Pension Plan, one of Canada’s largest public pension plans, said it achieved a return of 5.1 percent on its investments in 2015, with private equity investments the biggest contributor.

HOOPP said net assets grew to C$63.9 billion at the end of 2015 from C$60.8 billion a year earlier, and that its funded position was 122 percent at the end of 2015, up 7 percent from 115 percent in 2014.

“Even during a year of significant economic uncertainty, HOOPP remains fully funded, which means that we have sufficient resources to meet all of our current and future pension and benefit payments,” said HOOPP Chief Executive Jim Keohane.

Research by RBC Investor & Treasury Services last month showed Canadian pension funds achieved a return of 5.4 percent on their investments in 2015. The funds have pursued a strategy of directly investing in assets globally, including in private equity, infrastructure and real estate.

HOOPP’s private equity investments achieved a return of 17.7 percent in 2015.

Lastly, HOOPP put out a press release, HOOPP Strengthens Funded Ratio and Remains Fully Funded:

The Healthcare of Ontario Pension Plan (HOOPP) today announced its funded position was 122% at the end of 2015, up 7% from 115% in 2014. As a result of the stable funding position, contribution rates made by HOOPP members and their employers have remained at the same level since 2004.

The rate of return on investments was 5.12% for the year ended December 31, 2015, with net assets growing to a record $63.9 billion from $60.8 billion in 2014. Investment income for the year was $3.1 billion down from $9.1 billion in 2014, and HOOPP exceeded its portfolio benchmark by 1.17%, or $0.7 billion. The Plan’s 5-year return stands at 12.03%, the 10-year return stands at 9.32%, and the 20-year return at 9.46%.

“Even during a year of significant economic uncertainty, HOOPP remains fully funded which means that we have sufficient resources to meet all of our current and future pension and benefit payments,” said HOOPP President and CEO Jim Keohane. “Being fully funded means we are able to consistently deliver to our members and our liability driven investing approach has been critical to ensuring the long-term health and sustainability of the Plan.”

HOOPP’s liability driven investing (LDI) approach has served members well by providing stability through challenging markets. It is a holistic, long-term investment approach which considers the Plan’s assets in relation to pension obligations, in order to balance risk with returns.

For more information about HOOPP’s financial results please view the 2015 Annual Report, available on hoopp.com.

2015 Return Highlights

HOOPP’s liability driven investing approach utilizes two investment portfolios: a liability hedge portfolio that seeks to mitigate risks associated with our pension obligations, and a return seeking portfolio designed to earn incremental returns to help to keep contribution rates stable and affordable.

In 2015, the liability hedge portfolio provided approximately 62% of our investment income. Nominal bonds and real return bonds provided most of the income within this portfolio, generating returns of 8.9% and 2.2% respectively. The real estate portfolio was also a significant contributor during the year, with an 8.0% currency hedged return.

Within the return seeking portfolio, private equities were the largest contributor to investment income, returning 17.7% on a currency hedged basis, and other return seeking strategies also contributed to the income of the Fund. Public equities contributed 0.8%.

Rates of Return by Asset Class (Liability Hedge Portfolio)

Asset class 2015 Rate Of Return
Nominal bonds 8.9%
Real return bonds 2.2%
Real estate 8.0% (currency hedged)

Rates of Return by Asset Class (Return Seeking Portfolio)

Asset class 2015 Rate Of Return
Private equities 17.7% (currency hedged)
Public equities 0.8%

Other return seeking strategies also contributed to the income of the Fund.

On its website, HOOPP provides an excellent year in review section here. Take the time to skim through it all but I will provide you with a nice snapshot below (click on image):

As you can see, HOOPP has achieved super funded status, a term I reserve for any pension plan with over 120% assets to cover future liabilities. And it has done this using one of the lowest discount rates in the industry (5.6%) and at a lower cost than other large Canadian defined-benefit pensions and at a fraction of the cost of mutual funds.

What this means is that the contribution rates for members and employers will remain stable at least till the end of 2017 (see more details here). Above and beyond that, it also means HOOPP’s members will enjoy full inflation protection (ie., cost of living adjustment was bumped up from 75% to 100%).

Basically, HOOPP is a pensioner’s dream because the plan is super funded and 80 cents of each dollar paid in benefits comes from investment gains at a fraction of the cost of mutual funds which unlike HOOPP, offer no guaranteed (defined) pension payment for life. That’s the brutal truth on defined-contribution plans.

Now, let me go over HOOPP’s 2015 results in a little more detail. I will be referring to HOOPP’s 2015 year in review and to HOOPP’s 2015 Annual Report. Take the time to read HOOPP’s 2015 Annual Report as there is a lot of excellent information in this document.

I also had a chance to discuss HOOPP’s 2015 results with Jim Keohane, the president and CEO. Jim was kind enough to call me while on vacation and I thank him for taking the time to speak with me.

First, the 5.1% gain in 2015 was lower than that of the average Canadian pension fund which delivered 5.4% in 2015. It was also lower than OMERS’s 6.7% gain and a lot lower than the Caisse’s 9.1% gain in 2015.

So what accounted for HOOPP’s lower return in 2015? Jim Keohane cited three factors:

1. HOOPP dialed risk back last year in credit and public equities. “There was a lot of uncertainty and we didn’t feel like we were going to be properly compensated for taking risk in public markets.”
2. HOOPP hedges 100% of its currency risk. “This is done on a policy basis. Again, we don’t feel like we’re being paid for taking on currency risk so we fully hedge it. On a year like 2015, this cost us but over the long-run, we feel that there are too many unknown factors governing currencies so we prefer fully hedging that risk as our liabilities are in Canadian dollars.”
3. HOOPP has a lower weighting in private markets than other large Canadian DB pensions. “Real estate and private equity performed well last year, even after hedging out currency risk, but we don’t have a huge weighting in private markets like our larger peers.”

On this last point, take the time to view HOOPP’s asset mix and how they manage risk below (click on image):

You will notice that Private Equity represents only 5% of the total portfolio (most larger peers have between 10 and 15% allocation to PE) and Real Estate represents 12.5% of the total fund (those figures are a bit higher now). And you will also notice that unlike its larger Canadian peers, HOOPP has a huge allocation to Fixed Income (44%) and no allocation to Infrastructure whatsoever.

When I asked Jim Keohane about infrastructure, he told me flat out: “We aren’t against infrastructure assets but the pricing is too expensive right now” (no kidding!!). You will recall that Jim sounded the alarm on pensions taking on too much illiquidity risk three years ago on my blog.

On Real Estate, you can read details on page 21 of the Annual Report (click on image):

Interestingly, Jim told me that HOOPP is doing a few greenfield projects in Real Estate, including 1 York Street in Toronto where they will be moving into. “There is a huge gap between cost of a building relative to cost of construction right now.”

He also told me HOOPP has partnered with real estate funds in Canada, the U.S. and Europe where they have an equity stake in these funds (not paying 2 & 20). In the U.K., he mentioned that HOOPP is building industrial warehouses and Amazon will be one of its tenants (great tenant).

In Private Equity, there is not much in the Annual Report but the return was spectacular given that currency risk has full hedged (click on image):

But the most important driver of HOOPP’s overall return in 2015 was good old nominal bonds in the Liability Hedge Portfolio (click on image);

In fact, nominal bonds returned 9% for HOOPP in 2015, which is spectacular given that the Caisse only returned 3.8% last year in bonds, marginally beating its index by 10 basis points (3.8% vs 3.7%). This helped HOOPP’s managers beat their overall benchmark by 117 basis points in 2015 (click on image):

I asked Jim Keohane if they juiced their bond returns using leverage via derivatives and here is what he replied: “We made a significant tactical shift in bonds which enhanced the returns. We sold bonds into the rally in January and February and bought them back at much higher yields in October and November.”

Now, I’m not going to question him on that tactical call but when I see such a huge outperformance in a bond portfolio, there’s no question that there was significant leverage used to juice those returns. Not that this is a bad thing as they obviously got it right and this added some big returns to the overall portfolio.

In fact, as shown in the table below from page 60 of the 2015 Annual Report, HOOPP uses derivatives extensively for all sorts of value added activities (click on image):

One thing that strikes me as odd is why HOOPP doesn’t make tactical calls like this on the Canadian currency. In fact, I told Jim that negative rates are coming to Canada and in my humble opinion, shorting the loonie was one of the easiest calls to make in the last three years and I was very vocal about this on my blog when I stated it’s time to short Canada back in December 2013.

[Note: A lot of Canadian public pensions don’t have good currency teams, they don’t understand global macro trends and this is costing them big coin in terms of tactical currency moves. Some got lucky over the last couple of years as their policy is not to hedge or partially hedge currency risk, but most of them are completely clueless when it comes to currency risk and how to make money trading currencies.]

In its Annual Report, HOOPP states the following (click on image):

This helps explain the solid performance in bonds and mediocre one in Public Equities. Again, both HOOPP and OMERS delivered a lousy performance in Public Equities relative to the Caisse but it’s important to remember that the latter took risks in Public Equities that the former didn’t (more emerging markets and international exposure). And to be fair to the Caisse, it outperformed in all its public equities portfolios, including Canadian Equities (-3.9% vs -7.3% for the index).

So in Public Equities, it’s obvious the Caisse is doing something right even if I was very critical of the benchmark being used to gauge the performance of the “Global Quality Equities”.

I asked Jim Keohane what are his market thoughts. He told me he doesn’t “see another 2008 on the horizon.” They’re now neutral on U.S. and European markets and are overweight Canada. He said that both supply and demand factors explained the decline in oil but they’re overweight energy now and taking a “long-term view” as are other Canadian pensions betting on energy.

Jim also told me that he doesn’t understand why Canadian and especially U.S. banks move in unison with oil prices and that there is “no way Deutsche Bank is going under.”

But he also told me the risks he sees ahead are due to aging demographics in China, Japan, Europe and even in North America. “You can forget post-war growth rates over the next cycle, it’s just not going to happen.”

I agree with him on that and fear the worst as deflation sets in. I’m not as bullish as he is on energy and commodity names and would only trade these sectors given my long-term deflation outlook.

We also spoke about the new negative normal and interest rate sensitivity.  Jim told me that HOOPP “won’t be buying bonds with negative yields” and that despite rates being at historic lows, “the Plan’s liabilities are less sensitive to a decline in rates.”

Admittedly, that last point was a bit confusing for me as I told him that the duration of liabilities is a lot bigger than that of assets so in a low rate environment, you will see liabilities skyrocket when rates decline. But he told me that duration measures the “rate of change”, not the sensitivity of liabilities to moves in rates and that they stress-test their liabilities to make sure they’re on the right track (I need to get a better understanding of this).

In terms of taking more risk, I noted that HOOPP is a relatively young plan and it can take a lot more risk than Ontario Teachers or OMERS which have a lower ratio of active to retired workers. Here Jim was unequivocal: “Just because you can take more risk, doesn’t mean you should.”

That got us talking about chronically underfunded U.S. public pensions taking on increasingly more risk in hedge funds and private equity funds. “That’s a recipe for disaster because when you’re starting off from an underfunded position, you should be even more cognizant of the risks you’re taking because your very path dependent and much more vulnerable to a shock.” (I’m paraphrasing here but that was his clear message).

We also spoke about compensation. HOOPP is structured as a private trust, not a corporation, so it doesn’t have to publicly report compensation of its top brass. Jim told me that publishing compensation tends to inflate compensation and he told me that while HOOPP has competitive compensation, “the folks at CPPIB get compensated better at virtually every level.”

But he added: “People who come work for us come for the culture and the ability to do things they can’t do at larger shops. We’re a small team and portfolio managers here do a lot more trading across the spectrum than they’d be allowed to do at larger shops and they feel more engaged. Keeping the right culture is critical for us.”

Lastly, we talked about that silly Fraser Institute study on the costly CPP.  Here Jim was an ardent defender of CPPIB and DB plans. “That study double counted costs for CPPIB and the video they put up on their website about having more freedom with your money was just terrible and totally missed the point of why DB plans are better ar providing safe, secure retirement at a reasonable cost for Canadians.”

On that note, I thank Jim Keohane for taking some time while away on vacation to speak to me. I truly appreciate it. Any mistakes in this comment will be corrected and any additional information will be added in.

As always, I remind all of you that these comments take considerable time and effort so I would appreciate if you donate or subscribe to my blog on the right-hand side under my picture to support my efforts in bringing you the very best insights on pensions and investments.

More importantly, I am actively looking for work and would appreciate all the help I can get from Canada’s Top Ten pensions which I cover in detail on this blog. I’ve reached out to the leaders of these organizations and would appreciate their help in securing full-time employment doing what I love the most, analyzing pensions and investments.

 

Photo by www.SeniorLiving.Org via Flickr CC License

Officials representing the IMF and other creditors arrived in Greece on Wednesday to inspect the progress of the country’s pension reforms, which are a key condition the international bailout agreed to last year.

Greece offered its own pension reform plan in early 2016; but it wasn’t steep enough for the IMF. Additionally, creditors objected to parts of the plan that could put further stress on government finances.

More from CNBC:

Bailout inspectors returned to Greece on Wednesday to complete a review of the government’s economic reforms, which is needed before the country can get more rescue loans and much-needed debt relief.

The officials representing Greece’s European creditors and the International Monetary Fund are expected to discuss the government’s plans to manage the rising number of banks’ bad loans and to overhaul the troubled pension system.

The inspectors are monitoring progress of measures demanded under Greece’s third international bailout agreed last year with left-wing Prime Minister Alexis Tsipras.

“There are differences between the two sides, but that is the subject of our negotiation,” Economy and Development Minister Giorgos Stathakis told parliament before meeting the inspectors. He denied claims the negotiations have stalled.

Pierre Moscovici, the EU financial affairs commissioner, said a swift conclusion of the negotiations in Athens would pave the way for a debt relief deal that was likely to improve repayment terms but not see any direct debt reduction.

Read more P360 Greece coverage here.

 

Photo by “Flag-map of Greece” by en.wiki: Aivazovskycommons: Aivazovskybased on a map by User:Morwen – Own work. Licensed under Public Domain via Wikimedia Commons – https://commons.wikimedia.org/wiki/File:Flag-map_of_Greece.svg#/media/File:Flag-map_of_Greece.svg

Caisse de depot et placement du Quebec – Canada’s 2^nd-largest pension fund – revealed on Wednesday it’s plans to open its first office in India.

The fund will be scouting South Asian investments across all asset classes.

More from Reuters:

Canadian pension funds are expanding into new territories and investing directly in assets such as infrastructure and real estate as they seek alternatives to volatile global equity markets and low-yielding government bonds.

India is viewed as a prime investment opportunity, given its rapid economic growth and burgeoning middle class. The Canadian Pension Plan Investment Board, Canada’s biggest public pension fund, set up an office in Mumbai last year to scout for opportunities.

Caisse Chief Executive Officer Michael Sabia in a statement cited India’s “scope and quality of investment opportunities, the potential for strategic partnerships with leading Indian entrepreneurs, and the current government’s intention to pursue essential economic reforms.”

The Caisse also announced a commitment to invest $150 million in renewable energy in India.

Caisse managed about $230 billion in assets as of June 2015.

 

Photo by  Thangaraj Kumaravel via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Jacqueline Nelson of the Globe and Mail reports, OMERS posts 6.7-per-cent return, bolstered by infrastructure, real estate assets:

The pension plan for Ontario municipal employees earned a 6.7-per-cent return in 2015 as private market investments made gains.

The Ontario Municipal Employees Retirement System (OMERS) said Friday that its private equity, infrastructure and real estate investments performed especially well during 2015, cushioning the plan from volatility in the public markets.

Low interest rates and slower global growth contributed to a 0.7-per-cent return for public investments in 2015, down from 11 per cent a year earlier. Meanwhile, private investments showed solid performance with a 14.5-per-cent return in 2015, up from 9.1 per cent.

These results demonstrate “the importance of diversification, and investing in high-quality assets,” said Michael Latimer, chief executive of OMERS, in a statement. Net assets grew by $5-billion to more than $77-billion in 2015.

OMERS, which manages assets and administers pensions for 461,000 Ontario employees and retirees, continued to reduce its funding shortfall in 2015. The pension plan is now 91.5 per cent funded as a result of investment returns and member and employer contributions, compared with 90.8 per cent the year before. In 2010, OMERS said it planned to eliminate the deficit by 2025.

One year ago, OMERS said it would increase its exposure to infrastructure investments with stable cash flows in countries such as Canada and the U.S., as well as Australia. Over the course of last year the pension plan’s asset mix has tilted toward private investments, and infrastructure now makes up 16.4 per cent of the portfolio, up from 14.7 per cent a year before.

OMERS said its infrastructure holdings posted gains of 17.3 per cent, real estate earned 15.3 per cent and private equity investments earned 10 per cent in 2015.

Some of the pension plan’s largest deals of 2015 included infrastructure arm Borealis Infrastructure’s acquisition of Fortum Distribution AB, a large electricity distribution network in Sweden, along with a consortium. The deal was valued at about $7-billion (U.S.), according to data from Thomson Reuters.

OMERS also joined other pension funds on deals, including the $2.8-billion acquisition of toll road leading into downtown Chicago alongside Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan.

Mr. Latimer has also previously expressed plans to reduce the portfolio’s public market weighting to about 53 per cent. One year ago, it stood at 58 per cent, but this year public market investments such as stocks and bonds represented just 52 per cent of assets.

In 2015, OMERS received $3.8-billion (Canadian) in contributions from plan members and employers, and paid out $3.4-billion in benefits to the 141,000 people that receive an OMERS pension each month. About 18,000 people joined the plan as new members last year.

Yaldaz Sadakova and Jennifer Paterson of Benefits Canada also report, OMERS return drops to 6.7% in 2015:

As a result of slow global growth, low interest rates and market volatility, the Ontario Municipal Employees Retirement System (OMERS) saw its net investment return slide to 6.7% in 2015, down from 10% in 2014.

While the pension plan’s 2015 net return for public investments was 0.7%, down from 11% in 2014, it saw the net return for its private investments — which include private equity, infrastructure and real estate — grow to 14.5%, up from 9.1% in 2014.

Diversification is working for the fund, said Jonathan Simmons, chief financial officer at OMERS, during a presentation on Friday. “In a year where there were thin returns from fixed income … and poor returns from commodities, no one is surprised that our public investment returns were 0.7%, below the 11% return we enjoyed in the previous year,” he added.

“We had a solid return from our private equity group, held back a little bit by some of our exposure to a private equity asset we had in the Alberta oil and gas sector. But nonetheless, a respectable return for our private equity.”

Simmons added that it was an exceptional year for infrastructure – posting a return of 17.3% compared to 10.6% in 2014 – with strong gains across almost all assets in the portfolio, but most noticeably in its U.K. assets associated with the ports.

For real estate – which the results showed had a return of 15.3%, up from 8.7% in 2014 – Simmons said the pension fund experienced good returns in Canada, better in the U.S. and very strong returns out of its European portfolio.

The investor’s net assets grew to $77 billion in 2015, compared to $72 billion the previous year, “and we’re growing,” added Simmons.

“Where our exposures to our private investments in all of our asset classes have continued to grow, we are putting money to work.”

For example, in 2015, OMERS entered the Swedish market, buying Fortum Distribution AB and the Germany market through the purchase of Autobahn Tank & Rast Holding. It bought a UK consulting firm called Environmental Resources Management, and became the second largest landlord in Boston with three new office properties. It also expanded in Canada, with the redevelopment of Toronto’s Yorkdale mall just one example.

“We’re portfolio managers, not just aggregators,” said Simmons, “so while we have deployed $5.6 billion into the private markets, we’ve returned $5.5 billion to OMERS in terms of dividends, distributions and asset recycling.”

OMERS’ funded status climbed to 91.5% from 90.8% the year before as a result of investment returns as well as member and employer contributions.

“The good news is we exceeded our funding requirement,” said Simmons. “Our funding requirement for 2015 is 6.5%. That means we added $100 million of value above the funding requirement for the plan.”

In 2015, the pension fund received $3.8 billion in contributions from plan members and employers. It paid out $3.4 billion in benefits.

Approximately 18,000 new members joined OMERS in 2015 — an increase in active plan membership of 1% over the prior year. Almost 141,000 people receive pensions from OMERS every month.

OMERS put out a press release, OMERS Net Assets Exceed $77 Billion, Earns 6.7% Net Return in 2015:

In 2015, OMERS continued to make steady progress towards delivering secure and sustainable defined benefit pensions to the Plan’s members. Its funded status improved to 91.5% as a result of investment returns and member and employer contributions, compared with 90.8% the year before. OMERS earned a net investment return of 6.7% (after all expenses), exceeding its long-term funding requirement of 6.5%. Net assets grew to more than $77 billion in 2015, a $5 billion increase over 2014.

“Strong returns from private equity, infrastructure and real estate helped to offset challenges in public markets, demonstrating the importance of diversification, and investing in high-quality assets,” said Michael Latimer, OMERS President and Chief Executive Officer.

Public investments returned 0.7% (net) and private investments returned 14.5% (net). While private markets returns remained solid, financial markets are being challenged by slower global growth, continued low interest rates and increased volatility.

In 2015, OMERS received $3.8 billion in contributions from plan members and employers, and paid out $3.4 billion in benefits.

“We are pleased with the continued improvement of our funded ratio to 91.5% from 90.8%,” said Jonathan Simmons, OMERS Chief Financial Officer. “We remain very focused on the long-term health of the Plan, including a return to full funding and delivering even better value for OMERS members and employers.”

OMERS is an important part of Ontario’s retirement system and the broader economy. Approximately 18,000 new members joined the plan in 2015, leading to an increase in active plan membership of 1.0% over the prior year. Almost 141,000 people receive OMERS pensions every month.

“Our top priorities are serving our members, retirees and employers, and achieving our vision to be a leading model of defined benefit pension plan sustainability,” said Mr. Latimer.

About OMERS

Founded in 1962, OMERS is one of Canada’s largest defined benefit pension plans, with more than $77 billion in net assets as at December 31, 2015. It invests and administers pensions for 461,000 members from municipalities, school boards, emergency services and local agencies across Ontario. OMERS has employees in Toronto and other major cities across North America, the U.K., Europe and Australia — originating and managing a diversified portfolio of investments in public markets, private equity, infrastructure and real estate. For more information, please visit www.omers.com.

OMERS 2015 Annual Report will be made available later this month on its website here. For now, I highly recommend you read OMERS 2014 Annual Report for more details.

I will be referring to parts of the 2014 Annual Report and to the information above. One thing I like is OMERS’s long-term graph and explanation of its funded status below (click on image from page 6 of the 2014 Annual Report):

You’ll notice the Primary Plan’s funded ratio fell to a historic low in 2012 but has turned the corner and is improving. At 91.5% in 2015, OMERS has yet to reach fully funded status but it’s doing a lot better than it was four years ago and certainly a lot better than most U.S. public pensions which are chronically underfunded and pretty much doomed.

In terms of performance, 2015 was all about private markets. Unlike other large Canadian pensions, OMERS has a huge allocation to private markets (much bigger than everyone else) and those private investments really kicked in last year when public markets provided lackluster returns.

In particular, Infrastructure gained a whopping 17.3% last year, which is a testament to how OMERS Borealis is a global leader in infrastructure investments. But Real Estate and Private Equity also posted solid results, gaining 15.3% and 10% respectively in 2015.

And when almost half your assets are in private markets posting double digit returns, it helps explain why OMERS performed decently in 2015 even if its gains were not as strong as 2014 (click on image):

Now, the 2015 Annual report isn’t available but on page 12 of the 2014 Annual Report, we see the benchmarks OMERS uses to gauge its results (click on image):

Basically, OMERS uses absolute return benchmarks approved by the OMERS Administration Corporation at the start of each year.

While I understand absolute return benchmarks for private markets, I’m a little surprised that OMERS is using an absolute return benchmark for public markets which can get killed on any given year making it virtually impossible for OMERS to beat its overall benchmark on a year where capital markets are very weak (like in 2015).

And even in private markets, setting absolute return benchmarks can introduce all sorts of risk taking behavior which is not captured by these benchmarks. OMERS needs to do a much better job explaining all its benchmarks and how they relate to the risks being taken at individual portfolios.

The other thing that helped OMERS’s overall performance in 2015 was the decline in the Canadian dollar last year. Just like other Canadian pensions that defied volatile markets last year, OMERS benefited from direct investments in private markets and the decline in the loonie, which explains why its returns were marginally better than the 5.4% median return of other Canadian pension funds last year.

Still, OMERS didn’t perform as well as the Caisse which gained 9.1% in 2015 and part of the reason why is the Caisse’s Public Equities posted solid returns of 11.6% in 2015 vs its benchmark of 7.8% led by its Global Quality Equities and Emerging Markets portfolios (see my comment here).

Obviously OMERS Capital Markets dialed back risk in public equities and credit and I heard they invested a huge amount in Bridgewater’s All Weather fund which was down 7%  last year. I don’t know for sure but it’s obvious that OMERS didn’t take the same risks in public equities as the Caisse.

In terms of compensation, as you can see below from page 105 of the 2014 Annual Report, OMERS’s top brass is paid in line with the rest of Canada’s pension plutocrats (click on image):

One final note. I was very critical of OMERS, OTPP and AIMCo’s decision to acquire the London City Airport at a very hefty premium. Every expert I spoke with is scratching their head trying to justify such an outrageous multiple for an airport, even if its a prized asset.

Please note I contacted Michael Latimer and Jonathan Simmons to discuss OMERS’s 2015 results and ask them specific questions. If they come back to me, I’ll edit my comment to include their views.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Attracta Mooney of the Financial Times reports, US public pension deficits squeeze city and state budgets:

The health of the US public pensions system is deteriorating. The latest figures reveal that retirement plans have less than three-quarters of the assets they need to pay current and future retirees.

The growing pension deficit is putting “enormous” pressure on US cities and states, said Amin Rajan, chief executive of Create Research, a consultancy. It also raises concerns that some public retirement funds might not be able to pay out in future.

According to Wilshire Consulting, an institutional investment advisory company, state-sponsored pension plans in the US had just 73 per cent of the assets they needed in mid-2015, down from 77 per cent in 2014.

“Before the recession, many of these plans were fully funded or nearly fully funded,” said Russ Walker, vice-president of Wilshire Consulting.

In 2007, the state pensions’ funding ratio, a measure of assets to liabilities, stood at 95 per cent. An 80 per cent funding level is generally considered the minimum healthy level for public pension plans.

Large pension funding gaps have caused big problems for many US cities and states, including Detroit, where a $3bn public pension deficit contributed to the city’s bankruptcy.

Josh Rauh, a finance professor at Stanford University, said: “Cities such as Chicago and Philadelphia, and states such as Illinois and Kentucky, are already feeling the pinch as pension contributions are consuming increasing shares of their budgets.”

The full scale of the underfunding problem is likely to be even greater than Wilshire’s figures show, because of how the pension plans measure their funding levels, Mr Rauh added.

City and state officials have tried to take steps to close the pension funding gap, such as requiring new employees to make greater contributions to retirement plans.

Officials at pension schemes are also working hard to close the deficit, said Hank Kim, executive director at the National Conference on Public Employee Retirement Systems, a trade association for public pension plans in the US.

“The plans have learnt greatly from the financial crisis. Risk is a big concern and they have taken steps to mitigate any investment downside,” he added.

However, Tamara Burden, principal at Milliman Financial Risk Management, an investment adviser to pension funds, said many schemes are relying more than ever on making up the funding gap by assuming “exceptional asset returns”.

“Relying on strong asset returns in today’s market is a scary place to be,” she added.

Despite strong stock market performance in the year to mid-2015, many US pension plans found it difficult to meet their return targets, according to Wilshire.

Pension funds are likely to struggle for performance in the year to mid-2016, thanks to volatile trading conditions during the third quarter of 2015 and the start of this year.

Mr Rajan said US public pension schemes are in a difficult place. “Tackling the problem means unpalatable choices: fresh cash injections or reduced retirement benefits or increased retirement age, or some combination of the three.”

When it comes to pension deficits, keep your eyes peeled on bond yields because the lower they go, the more future liabilities and pension deficits rise. And when asset values drop, it adds more pressure on pensions, especially if they’re chronically underfunded like many U.S. state, city, municipal and local pensions are.

Right now, stocks have erased almost all of the 2016 losses but U.S. bond yields remain at historic lows despite bonds posting the biggest weekly selloff since November after Friday’s better-than-expected jobs report. And when it comes to pensions, ultra low rates for years and the new negative normal spell big trouble ahead, especially if deflation sets in.

The critical point to remember is that when rates are at historic lows, every drop in global long bond yields represents a huge increase in future liabilities for pensions. Why? Because the duration of liabilities is a lot bigger than the duration of assets which means that every drop in bond yields disproportionately impacts pension deficits.

This is why you see Canada’s large public pensions scrambling to buy infrastructure assets like London City Airport at a hefty premium. They need to find assets that are a better match to their long dated liabilities. We can argue whether Canada’s mighty pensions are paying too much for these “premium infrastructure assets” (I think so) but this is the approach they’re taking to defy volatile public markets and find a better suitable match for their long dated liabilities.

And unlike the United States, Canada’s large public pensions have the right governance to go out to do these direct investments in infrastructure. Also, unlike their U.S. counterparts, Canada’s large public pensions have realistic investment assumptions and are better prepared for an era of lower returns.

In the U.S., public pensions are delusional, firmly holding on to the pension rate-of-return fantasy. They’re also held hostage by useless investment consultants that shove them in the same brand name private equity funds and hedge funds. This doesn’t always pan out well for these public pensions but it enriches private equity titans and hedge fund gurus who collect outrageous fees no matter how well they perform.

Of course, things might be turning around for pensions. Copper bears are turning into bulls and hedge funds are turning bullish on oil which bodes well for those betting big on a global recovery.

In fact, last week we saw huge moves in energy (XLE) and metal and mining (XME) stocks. There were huge gains in dogs like SeaDrill (SDRL) which I’ve been short since October 2014 but also in many natural gas, steel, copper and coal names like Chesapeake (CHK), U.S. Steel Corp. (X), Freeport McMoRan (FCX), Peabody Energy (BTU) and Teck Resources (TCK).

Last week was a great week for Carl Icahn who loaded up on a few of these names in his portfolio. And this week is starting off great for funds betting big on a global recovery as we even see moribund shipping companies like Eagle Bulk Shipping (EGLE) and Genco Shipping (GNK) take off (click on image to view a sample of stocks I track closely):

But the question remains will it last or is this just another short covering rally destined to fizzle out? I’ll tell you, if I’m an underfunded U.S. public pension, I’d be hoping that assets and bond yields continue to rise from these levels, but given my Outlook 2016, I’d be very careful not to read too much into these explosive countertrend rallies in beaten down energy, commodity and emerging market stocks. These are great rallies to trade but don’t overstay your welcome.

As far as U.S. public pensions, some are already doomed and are now facing very difficult choices ahead.

Pennsylvania Governor Tom Wolf has been harping on the state pension funds’ investment expenses for over a year, and included a fee reduction initiative in his 2015 budget proposal.

That proposal didn’t pass – but the state’s two major pension systems independently cut millions in management fees last fiscal year, according to data released by the systems.

More from the Associated Press:

The Public School Employees’ Retirement System says its fees fell from $558 million in the year that ended in mid-2013 to $455 million in the year that ended July 1.

That’s an 18 percent reduction of $103 million over two years.

The State Employees’ Retirement System’s fees fell about 10 percent between 2014 and 2015, from $177 million to $159 million.

That’s a drop of $18 million.

SERS says its fees are down by more than $76 million since 2010.

Pension officials haven’t yet detailed how they achieved the savings.

 

Photo by TaxRebate.org.uk via Flickr CC License

Later this month, a suit by retirees over frozen pension COLAs will hit the halls of New Jersey’s highest court.

In 2011, New Jersey lawmakers passed a pension reform package that raised retirement ages, increased worker contributions and froze COLAs unless the pension plans surpassed a certain funding benchmark.

Workers argue the law was a breach of contract, especially because Gov. Christie – who signed the bill, which required full annual payments from the state – didn’t hold up his side of the bargain.

A lower court ruled against the retirees.

More from NJ.com:

The state Supreme Court will hear oral arguments later this month in a case addressing whether the state must restore retired public workers’ cost-of-living adjustments.

Retirees argue that a state law freezing their COLAs ran afoul of their rights to their pension benefits. The state’s high court is scheduled to hear arguments at 10 a.m. March 14. The outcome could wipe out tens of billions of dollars lawmakers expected to save the pension system over three decades.

All together, those changes were to save the state $122 billion over 30 years, and the COLA suspension accounted for more than half of those savings.

Senate President Stephen Sweeney, who partnered with Christie on the 5-year-old reforms, has said losing the case and being forced to restore the increases and reimburse retirees could cripple the already shaky system.

Moody’s Investors Service weighed in in January, saying that the state portion of the total unfunded pension liability would increase from $40 billion to about $53 billion, and the system would fall from 51 percent funded to 44 percent funded if the court strikes down the freeze.

Oral arguments will begin on March 14.

 

Photo by  Lee Haywood via Flickr CC License